Proposed changes to the UK Takeover Code

Review of Rule 21 and Other Matters

On 15 May 2023, the UK Takeover Panel published a consultation paper (PCP 2023/1). The PCP focuses primarily on Rule 21.1, which restricts the board of a target company from taking any action which may result in (a) an offer or possible offer being frustrated, or (b) an offer being made on less favourable terms. Whilst the PCP does not propose any fundamental changes to the rules, it  looks at ways to increase flexibility for target companies to carry on ordinary course activities during the course of an offer and provides additional guidance as to how the Panel would interpret the rules going forward.

So, what do you need to know?

Set out below are five key takeaways from PCP 2023/1.

1. More flexibility for target boards … Target boards would be given more flexibility to take actions deemed not to be material or to be in the ordinary course, without the requirement for a separate shareholder vote. Whilst targets would still be required to consult the Executive to determine whether Rule 21.1 restrictions should apply to the proposed actions, the Panel would be less likely to feel the need to consult with the bidder prior to reaching its decision. In all such cases, the action would only be restricted if it was both outside the ordinary course and material, except in the context of issuing new target securities, in which case there would be no materiality threshold.
2. Clearly defined "restricted period" … The time period under which Rule 21.1 restrictions would apply would be clearly defined and run from the earlier of (a) the target board receiving an approach, and (b) the beginning of the offer period, until (i) the end of the offer period, or (ii) where no offer period has begun, 5.00 pm on the seventh day following the date on which the latest approach was unequivocally rejected by the target board. In the context of a target-run sale process, Rule 21.1 would not apply until the target received at least one indicative proposal.
3. Reverse takeovers captured … Rule 21.1 would now be applied to a bidder in the context of a reverse takeover as if the bidder were the target. By applying Rule 21.1 in this way, the (larger) target would be able to gain comfort that there would be no diminution of value of the smaller (bidder) during the offer period, without the need for further contractual protections which would otherwise be prohibited.
4. Scheme sanction not captured … Following on from PCP 2022/3, the proposals provide that, other than in exceptional circumstances, the Panel would not apply the restrictions under Rule 21.1 where a target board seeks to sanction a scheme of arrangement in a competitive situation. The Panel is also proposing to make minor amendments to the Code to allow bidders more flexibility in competitive situations to extend the "mini-long-stop dates" with the consent of the Panel only.
5. Equality of information amongst bidders … Rules 21.3 and 21.4 will be amended so that competing bidders would no longer be required to make specific or daily information requests. Instead, all information that has been provided to one party would, on request, need to be provided in full to the competing bidder. Such requests would be deemed to remain open for seven days. Similarly, an MBO management team would be required to provide all information given to external financiers to the independent directors on a rolling basis. The Panel's intention is to minimise the unnecessary administrative burden related to repeated requests for information under these rules.

The new guidance, if adopted, would be set out in Rule 21.1, the related notes and in a new Practice Statement 34. The consultation period runs until Friday 21 July 2023. The Panel expects to publish its Response Statement in Autumn 2023 and for the amendments to come into effect approximately one month after the publication.